The Euro (EUR) has seen a slight drop of 0.2% against the US Dollar (USD), giving back some of this week’s earlier gains. However, interest rate differences still favor the Euro, helping it recover from losses earlier in July. The European Central Bank has kept its current policies in place. This has caused a rethink in the market’s expectations for rate cuts, which are now projected to be about 15 basis points by the end of the year—10 basis points less than before.

Euro Bullish Multi-Month Trend

Germany’s IFO sentiment figures matched expectations, while preliminary CPI data will be released next week. The Euro is on a bullish trend over the past several months, showing higher lows and highs since February, along with a bullish RSI above 50. In the near term, we expect the Euro to trade between 1.1700 for support and 1.1780 for resistance. It’s crucial to do thorough research before making any investment choices, as investing carries risks, including the loss of your entire principal. Due to the favorable interest rate differences, we view the recent dip as a potential buying opportunity. The European Central Bank’s stance indicates fewer rate cuts ahead, with money markets now pricing in a single 15 basis point reduction by the end of 2024— a notable change from earlier predictions. This supportive environment leads us to maintain a cautiously optimistic outlook on the currency.

Strategy and Positioning

The upcoming preliminary CPI data for the Eurozone is a significant event to watch. September’s headline inflation was 2.9% year-over-year. If the new data comes in higher, it will strengthen the central bank’s position and likely push the Euro higher. We should be prepared for possible increased volatility around this release. Considering the expected trading range, we can use options to take advantage of sideways movements. Selling out-of-the-money puts near the 1.1700 support level may be a good strategy to collect premiums, as we believe this level will hold. This method will gain from time decay as long as the Euro remains stable. For those who support the bullish multi-month trend, buying longer-dated call options can be a way to benefit from potential price rises beyond the immediate range. Historically, when interest rate expectations between the US and Europe shift in favor of the Euro, the EUR/USD has shown sustained uptrends for several quarters. This was clear during the rally starting in late 2022 after the policy changes. However, we need to stay alert to underlying economic weaknesses, as seen in the February reading of the German IFO business climate index at 87.3. A significant drop below the 1.1700 support level would undermine the immediate bullish outlook. This level is crucial for managing risk on any long derivative positions. Create your live VT Markets account and start trading now.

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